By James Glynn 

SYDNEY--The Australian government said Thursday it will not seek to hold a special parliamentary inquiry into recent activity in the iron-ore market, backing mining giants in a bitter row which had roiled the country's powerful resource industry.

"After discussing the issue with regulatory bodies and stakeholders across the resources sector, the Government will not be initiating an inquiry at this time," Treasurer Joe Hockey said in a statement.

The decision represents a turnaround for the conservative government after Prime Minister Tony Abbott last week backed a special inquiry, saying it was important to discover the facts underpinning sharp falls in prices for the country's chief export.

Independent Senator Nick Xenophon has been calling for parliament's economics committee to investigate claims that mining giants BHP Billiton Ltd. and Rio Tinto PLC are driving down prices by boosting supply to undermine smaller competitors, while also delivering an A$18 billion blow to Australia's budget through lost revenue.

Fortescue Metals Group Ltd. Chairman Andrew Forrest, who campaigned for a review of the Australian industry, expressed disappointment in the decision. The company's ore is lower quality and costlier to dig up than that of BHP and Rio Tinto, so Fortescue--the world's fourth-largest producer of the commodity--is finding it more difficult to weather the sharp downturn in iron-ore prices.

"This denies the Australian people the opportunity to shine a light on the iron-ore industry and to understand whether it has been operating as an open market in which producers act to maximize the value of the resource for our nation," Mr. Forrest said in a statement.

"My view is the threat of oversupply, or self-harm by Australia in a market it dominates, is the biggest factor" behind the downturn, he said.

BHP Chief Executive Andrew Mackenzie said the company welcomed the decision. "We thank the Government for its consultation across the industry," he said.

A representative for Rio Tinto couldn't immediately be reached for comment.

Earlier this week, Mr. Mackenzie cautioned that a parliamentary review would send "a terrible signal" to iron-ore buyers in countries including China and Japan, and could encourage them to invest more in other resource-rich countries such as Brazil to diversify their sources of supply.

The Minerals Council of Australia, a lobby group for the mining industry, also said last week it welcomed a parliamentary inquiry to help expose the idea that higher Australian production was chiefly responsible for the dramatic price falls on the global market.

The iron ore price has collapsed to decade lows in the past year as swelling supply from mines in Australia's Pilbara region has met cooling demand from China's steelmakers.

Some smaller Australian producers have been among the most vocal critics of their larger rivals' strategies. Companies such as Fortescue are more vulnerable to lower prices because they lack the scale to keep down production costs.

The price falls have become so pronounced that they are eating into tax revenue, making it harder for the government to improve the nation's finances as promised at the last election, while producers with high cost bases are now threatened.

Opposition leader Bill Shorten said the uncertainty around an inquiry had damaged investor confidence in Australia.

"There is no doubt the Prime Minister's actions and those of his Ministers have damaged the industry. This has been a debacle entirely of the Government's own making," Mr. Shorten said in a statement.

Sen. Xenophon said he would keep pushing for an inquiry, though he said the idea had likely been killed by a "shock and ore" campaign of pressure on lawmakers by big mining companies, mirroring previous success in overturning a profits tax on resource companies.

"You've got to ask, given this extraordinary turn of events: where does the real power lie in this country?" he said in a statement.

Rhiannon Hoyle, Rob Taylor in Canberra and Rob Stewart in Melbourne contributed to this article

Write to James Glynn at james.glynn@wsj.com

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